The UPA chairperson has reportedly sent a letter to the government for reducing import duty on gold and relaxing the 80:20 import-export rule
As India tries to get out of an economic mess, more and more people are dispensing expert economic advice. After Baba Ramdev peddled the muddled idea of abolishing all taxes and replacing it with only banking transaction tax, Sonia Gandhi, the president of Congress and chairperson of United Progressive Alliance (UPA) has sent a letter to Ministry of Commerce to reduce duty on gold imports. According to a news channel, the Congress president has even asked the government, which she indirectly controls, to relax the 80:20 gold import-export rule. There are two aspects of this whole episode. One, Sonia Gandhi is de-facto chief of the UPA government and thus can issue an order instead of writing a letter and two, both the decisions, to increase import duty on gold and implementing 80:20 rule (20% of total gold import should be used for export) were taken to achieve certain objects under the economic situation of the country. But then as the wise says in times of general elections, prudent economic decisions always go for a toss.
Earlier in October, the Indian government hiked the gold import tariff value to $442 per 10 grams from $436 per 10 grams. This step was taken to contain the widening current account deficit (CAD). In addition, Reserve Bank of India (RBI) also restricted the import of gold on a consignment basis by banks. However, these measures gave rise to gold smuggling as the increase in import duty on gold to 10% by India created a gap in gold prices with places such as Dubai and Thailand where the duty is just 1%.
Both the World Gold Council (WGC) as well as RBI governor, Raghuram Rajan, admitted a spurt in gold smuggling into India, after the government imposed curbs on gold imports. While admitting an increase in gold smuggling in India, the RBI governor said it has been on a very low base and the shrinking of CAD had largely to do with the restrictions places on gold imports.
According to WGC report, Thailand is being used as a route to channel gold into other markets, notably India and Vietnam. The increasing prevalence of small gold bars within jewellery retailers across the Asian region supported demand in Thailand. At the same time, in India, the main focus of demand during the quarter was on small gold bars; indeed, a shortage of 100gms gold bars pushed premiums on these products significantly higher by the end of September, the WGC said in a report.
Last year, the RBI introduced the 80:20 rule for limiting gold imports and thus contain the CAD. Following the tightening measures by the central bank, India's trade deficit widened in December, but imports continued to fall, driven by curbs on gold. The trade deficit stood at $10.14 billion compared with $9.22 billion in November. However, trade deficit for December eased significantly on a year-on-year basis.
Earlier this month, the RBI allowed gold loan companies to give higher amount of loan against gold jewellery pledged by borrowers. NBFCs can now give up to 75 %, up from 60 % now, of the value of the gold jewellery pledged as loan. The RBI has clarified that only the intrinsic value of gold contents should be taken into account for determining the value.
Meanwhile, Gold imports in the current financial year could be lower by 40% at 515 tonnes against 846 tonnes a year ago, says a report from a brokerage.
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam